Paging the New “Deficits Don’t Matter” Crowd

by Pejman Yousefzadeh on April 19, 2011

It just got a whole lot tougher for you to claim that we don’t need to worry about the present fiscal crisis:

The ratings agency Standard & Poor’s warned the United States on Monday that it could lose its coveted status as the world’s most secure economy if lawmakers don’t rein in the nation’s nearly $14.3 trillion debt.

The finding, the first of its kind in the 60 years that S&P has been judging the country’s credit quality, sent a jolt through the markets and injected a new sense of urgency into the debate gripping Washington over whether to allow the Treasury to keep borrowing.

S&P changed its outlook on the United States from “stable” to “negative” and said the federal government could lose its AAA rating if officials fail to bring spending in line with revenue.

The AAA rating identifies the United States as one of the world’s safest investments — and has helped the nation borrow at extraordinarily cheap rates to finance its government operations, including two wars and an expensive social safety net for retirees.

A downgrade would drive up the cost of borrowing and throw into question the global role of the Treasury bond. The Treasury serves as a crucial risk-free place to invest money — and has been a stalwart of stability amid the economic upheaval of the past few years.

This represents yet another effort to try to warn the United States that our current fiscal path is totally unsustainable. The question is whether anyone will heed the warning. To be sure, this report highlights the dangers of defaulting on our debt, which perhaps will make any refusal to increase the debt ceiling less likely. But while the debt ceiling needs to be raised, we also need to have more spending cuts, and a new, flatter tax policy featuring lower rates, a broader base, the elimination of deductions, and if necessary, a VAT. If we fail to do this, borrowing money will become a great deal more expensive, making it far more difficult for us to finance national priorities, and maintain our current quality of life.

A fiscal disaster is looming on the horizon. We can avoid it, but only if we act now. If we continue to dither, the results will be catastrophic.

Are the members of the new “deficits don’t matter” crowd paying any attention whatsoever? Well, Paul Krugman, citing Japan, thinks that a downgrade doesn’t matter. Just out of curiosity, who in the United States wants us to trade our economic situation for that of Japan’s? And does Krugman really think that interest rates will remain low simply because he took a snapshot of yesterday’s action, and found that the rate on ten year T-notes was not much affected by the S&P report? Apparently, in addition to believing that deficits don’t matter, Paul Krugman also believes that social science doesn’t matter all that much either.